The New York Court of Appeals recently upheld the constitutionality of New York Tax Law section 1101(b)(8)(vi). This statute creates a rebuttable presumption that an internet retailer is soliciting business in New York state (and therefore is a "vendor" subject to the New York sales tax laws), if the internet retailer pays a commission to a New York resident (an "affiliate") for referring customers to the internet retailer’s website. Specifically, under Section 1101(b)(8)(vi), if an internet retailer generates at least $10,000 in annual sales from these referrals, then the internet retailer is a vendor and consequently is required to collect New York sales tax on all sales to New York residents. Internet retailers should review their operations and affiliate arrangements to determine whether New York’s law, and similar laws enacted by other states, may require the internet retailer to collect sales tax on sales to New York residents.
Amazon and Overstock both challenged the New York statute, arguing the law is unconstitutional on its face because it (i) required online retailers to collect sales tax without a physical presence, thus violating the commerce clause, and (ii) created an irrational, irrebuttable presumption a seller was soliciting business in New York state, thus violating the due process clause.
The Court of Appeals held that (i) the physical presence requirement of the commerce clause was satisfied because economic activities were being performed in New York state on behalf of the internet retailers, (ii) this physical presence was sufficient to satisfy the commerce clause’s "substantial nexus" requirement, (iii) the due process clause was satisfied because an internet retailer using in-state affiliates are engaging in continuous and widespread solicitation within that state and therefore has fair warning that such internet retailer may be subject to tax within that state, and (iv) it is rational to presume resident affiliates will solicit other residents in order to increase such affiliate’s commissions.
There is a potential for future litigation as this law is applied to specific arrangements between internet retailers and their affiliates. Furthermore several other states, including California, Illinois, Pennsylvania and Texas, have enacted similar laws requiring internet retailers to collect sales tax in similar situations.
Thus, companies selling goods over the internet should review their affiliate arrangements to determine whether collecting New York sales tax is required under New York’s "Amazon" Law and the laws of other states as well.